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UK: SMITH ON ECONOMICS - THE UK - EMU'S PROBLEM CHILD.

UK: SMITH ON ECONOMICS - THE UK - EMU'S PROBLEM CHILD. - Big decisions about EMU entry have to be made by the end of next year. Britain's approach, David Smith believes, will be typical of its attitude to Europe - stay out but leave all options open.

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Published: 01 Oct 1996

Last Updated: 31 Aug 2010

Big decisions about EMU entry have to be made by the end of next year. Britain's approach, David Smith believes, will be typical of its attitude to Europe - stay out but leave all options open.

Part of the service this column provides for Management Today readers is to give some early warning signals of impending events. As such events go, they don't come much bigger than economic and monetary union (EMU).

By the end of next year, the British Government, be it Conservative or Labour, will have been forced to make its mind up about whether it wishes to be considered for the third and final stage of EMU. The ministers of the day will have taken a decision on whether they wish to begin a process which will lead to the handing over of monetary policy decisions to the new European central bank from 1 January, 1999.

This will result in the replacement of the pound with the euro by the middle of 2002 - that's less than six years away.

The implications of EMU are enormous. Because it has been looming for so long, and because it has been the source of so many splits among our politicians, it is easy to forget just what is being contemplated. EMU is an institutional change bigger than any other I can think of. For, by common consent, EMU will be irreversible. Suck-it-and-see is not a strategy on offer.

Strong political will to qualify

Six months ago, in the April issue of this magazine, I noted the increasing likelihood that most European countries would fail to meet the Maastricht criteria for participation in EMU. In particular, the achievement of budget deficits of 3% of GDP or under, alongside national debt of 60% of GDP or below by 1997, the qualifying year, looked to be a struggle even for France and Germany. I also noted, however, that the political will in those countries pushing towards monetary union was extremely powerful. Everything I have heard and read since writing that piece has confirmed my views. There is unlikely to be a quorum of countries meeting the criteria on even a relatively moderate interpretation of the rules.

It is also clear, however, that when economics and politics clash, the latter usually emerges triumphant.

So what should we expect? Decision time for participation in EMU will be the spring of 1998 although those wishing to participate should declare their intention of doing so by the end of 1997. We can take it more or less as read that a core set of European countries - Germany, France, Belgium, Luxembourg, the Netherlands and Austria - will ensure, by hook or by crook, that they qualify. Less certain is the position of others, notably Ireland, Italy, Spain, Finland and Sweden. Portugal and Greece have no realistic chance, while Denmark has effectively decided not to take part.

This leaves Britain, so often Europe's problem child. There are various options. The first is that, between now and the general election, either the Conservatives or Labour will have shifted from their present position of leaving open the option of entering EMU during the lifetime of the next parliament. If one of the two parties does this, there's a good chance that the other will too - note the way in which they have moved virtually in tandem to pledging a referendum on a single currency. This strategy would leave Britain without a voice as the final technical details of EMU are settled but would at least have the virtue of certainty.

The second possibility is that the 'all options open' stance is maintained.

When the decision time arrives (in the aftermath of a May 1997 general election), Britain does what everyone expected her to - stays out but leaves open the option of joining when 'the time is ripe'.

Sterling's shaky candidature

A third outcome is that the Government decides it wants to take part, but is then rejected by the other member states for not meeting the economic criteria in the spring of l 998. As a rejection it would not quite rank with de Gaulle's famous 'non' to British membership of the Common Market, but it would be a pretty substantial humiliation for all that. It would not be hard to come up with a reason for turning down sterling's candidature on technical grounds - non-membership of the exchange rate mechanism (ERM) violates the Maastricht economic criteria.

A fourth possibility, and arguably a more humiliating rejection, would be if the British Government applies for membership, is accepted on the basis of fudged criteria by the others, puts the decision to a referendum only to be rejected by the people. This would be like September 1992 all over again, with the central plank of the Government's economic policy cast scornfully aside, in this case not by the markets, but by the voters.

Finally, we should not discount entirely the chances of a British government, more probably led by Tony Blair than by John Major, being welcomed in a show of brotherly affection by the rest of Europe, and taking its place, proud and steadfast, in the first rank of EMU countries.

Pre-election rejection ploy?

So which is it going to be? Although pre-election rejection of EMU has been ruled out by both party leaders, opinion polls suggest it could be a significant swing factor and, for the Conservatives in particular, could be a last throw of the political dice.

The second possibility - the 'all options open' approach - must remain the favourite because it represents such a typically British approach to Europe. I cannot believe a British government would be so inept as to fall into the trap set out in the third (turned down on economic grounds) or fourth (turned down by the voters) scenarios - in the first it would surely ensure there was European support for an entry bid, in the second it would work hard, as in the 1975 referendum on membership, to turn public opinion around.

Outright, untroubled entry would be a non-starter under a re-elected Tory government, I believe. There is a better chance under Labour, but I would put it no greater than one in three. My guess is that Britain will not be in the first rank of EMU countries. But getting from here to confirmation of that position promises to be an extremely rocky road.